“Marketing is a waste of resources if you are not going to do something
with the leads you generate.” quipped Russ Molinar, director of Global
Markets at Ernst & Young. “Winning new business requires firms to
tie marketing to sales. Unfortunately many firms fail to connect the
two and the result is less than desirable.”

June 18, 2010

Professional service firm marketers need to understand the concept of the "effective billing rate." It is a metric that every professional services firm measures. The best explanation I've seen comes from Mercer Capital's new president, Matt Crow, in one of his addresses to the firm:

One thing Mercer Capital has in common
with all professional services firms is that our production implements
are people and that people are mortal. This is significant because
mortals don’t live forever, and as a result time is precious, and time
is money.
Your career will probably span something on the order of 50 years, and
in that 50 years or so you have to maximize your economic opportunity.
One measure of how well you’re doing is the effective billing rate. Put
simply, it is the total professional fees
we receive from a given project, divided by the number of hours put in
the project.

Obvious? Yes. But stay with me. As a professional services firm, we
have a certain inventory of billable hours to sell. In a given year,
there are approximately 252 eight hour work days, and the typical
professional services firm hope to fill about two
thirds of those hours with billable activity. Yes, you can do more for
short periods of time, but eventually the rest of your life intrudes, you take a vacation, and the firm can no longer bear the opportunity
cost of you not doing other, important, non-billable
activities, like marketing, training, systems development, etc.

You can think of the effective billing rate as a happiness index. When
it goes up, we are all better off, when it drops, we are miserable.

How do we get our effective billing rate up? The metric is a
numerator/denominator kind of equation, so we can either get the
numerator (our fees) up, or get the denominator (number of hours
required to do a job) down. We can control both. Although the market
sets our fees, we can make our services worth more to the market by
enhancing our image, increasing the quality of our work, providing better service,
increasing our specialization, and becoming more the sort of firm that
everyone wants to do business with. We can minimize the
hours we put into a job by becoming more efficient, planning the job,
communicating with each other and with our clients about what we need to
get it done, learning excel tricks, enhancing our templates to make
them easier to use, and attracting work that
we are very familiar with doing such that we can do it well and do it
quickly.

Each of us has a role in maximizing the firm’s effective
billing rate.

Marketing professionals can't do much about the denominator (# of hours required to do a job) in the effective billing rate equation. However, the activities that we initiative and/or coordinate should positively impact the numerator (fees). In their excellent book, Professional Services Marketing, Mike Schultz & John E. Doerr state that:

"Good marketing can:

Create conversations with potential buyers

Increase your odds of winning client engagements

Generate higher revenue per engagement and higher fees

Increase affinity with actual and potential workforce"

Marketers in professional service firms need to be savvy enough to understand the importance of the "effective billing rate" metric. It's certainly not the only metric measured but I would wager that every professional services firm tracks it. Use it as yet another way to measure the impact of your success.